Cormac Hollingsworth tries economics again

So it’s quite possible that lower gilt yields are more a sign of panic about the economy than sign of credibility about the deficit.

Hmm, interesting idea.

So let\’s have a little look around Europe shall we? In Germany, pretty much everyone is happy with the way the economy is working. They floated some two year paper at 0% last week.

No one\’s very happy with the Spanish economy: ten year yields are 5.5% or so. Italy, no, not happy bunnies with that economy either, ten year yields are what, 6.5%? People are panicking about the Portuguese economy and yields, at least last time I could bring myself to look they were, were 17% odd. I\’m not sure you can manage to work the word happy into a sentence about the Greek economy: I\’m also not entirely certain that it\’s possible to calculate a yield on their bonds using standard mathematics.

So, low interest rates on government debt at present seem to be linked to people being pretty happy about matters economic in that country or to people being in panic about that economy?

Yes, quite, and isn\’t it interesting that Cormac chose the wrong answer?

5 thoughts on “Cormac Hollingsworth tries economics again”

  1. Chap has the beginnings of a point – it’s true that cash will be directed towards safe havens like gilts when there are few low-risk investments available in the real economy, but then decides to destroy it. Market confidence in austerity measures and nowhere else to put your money are two things that can happen at once and be mutually supportive. People buy gilts when they’re worried about short-term growth, true, but they’ll only buy those gilts if they think they’ll be repaid.

  2. Quick! To the currency union in crisis! That’ll be the best place to draw comparisons with the debt dynamics of the UK.

    Really Tim?

    Or, how about we compare the UK with the US or Japan? Whose debt dynamics match those of the UK and which completely support Cormac’s point.

    Seriously, its as if you don’t read Brad DeLong’s blog, and I know you do. I’m pretty sure you’ve read Scott Sumners too, so you should know a UK recovery would see interest on long dated bonds rise because people expect economic growth. It would look like positive developments were being punished.

    Two effects: Weaker growth make bonds look more attractive and hence push down their price but weaker growth also reduces the government’s capacity to tax to honour that debt.

    All Cormac is arguing is that the UK has 1) never defaulted on its debt 2) is run by two parties committed to seeing this record continue 3) hasn’t had massive protests like those in Spain or Greece 4) has its own currency 5) is seen as a “safe haven”.

    All of those facts, combined with things I know you know about economics make this post very confusing. Interest rates are complicated, but not that complicated.

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